RFR Usage in Rare Decline
Posted by Colin Lambert. Last updated: February 9, 2023
Amidst a long-term trend of rising adoption, January saw a rare decline in the use of risk-free rates (RFR), in terms of percentage of overall interest rate derivative (IRD) volume.
The ISDA-Clarus RFR Adoption Indicator declined to 51.1% in January 2023 compared to 54.3% in December 2022. The indicator tracks how much global trading activity (as measured by DV01) is conducted in cleared OTC and exchange-traded IRD that reference the identified RFRs in six major currencies.
On a traded notional basis, the percentage of RFR-linked IRD fell to 48.5% of total IRD transacted in January 2023 compared to 50.1% the prior month. While total IRD trading activity increased in January 2023, trading in legacy rates grew more than trading in RFRs, resulting in a lower percentage of RFR-linked transactions, ISDA says.
Elsewhere, RFR-linked IRD DV01 increased to $18.1 billion from $14.4 billion in December, while total IRD DV01 grew to $35.5 billion compared to $26.5 billion. RFR-linked IRD traded notional rose to $98.1 trillion from $73.6 trillion and total IRD traded notional increased to $202.5 trillion compared to $147.0 trillion in December 2022.
The percentage of trading activity in SOFR declined to 58.5% of total USD IRD DV01 in January 2023 compared to 64.1% in December, while CHF, GBP and JPY accounted for 100% of total CHF IRD DV01, 99.8% of total GBP IRD DV01 and 98.0% of total JPY IRD DV01, respectively. JPY had the highest percentage of RFR-linked IRD DV01 executed as transactions with tenors longer than two years.
